STRATEGIC MANAGEMENT IN ISLAMIC FINANCE – Book Sample
Summary and Concluding Remarks – STRATEGIC MANAGEMENT IN ISLAMIC FINANCE
This chapter serves as a summary appraisal of the main arguments and major results of both the analytical framework and the empirical study. It is organized in three sections. It starts with an analytical and empirical summary. Next, implications of the study for Islamic financial institutions are described. Finally, research limitations and suggestions for future research are discussed.
Analytical and Empirical Summary
The present research developed a holistic conceptual framework for identifying and testing key success factors of Islamic financial institutions. The framework integrated insights into the current practices in Islamic finance, a variety of theories – namely the market-based view, the resource-based view, and, to some extent, New Institutional Economics approaches – as well as previous research from the fields of strategic management and economics.
It was empirically examined using a questionnaire-based survey of 36 Islamic financial institutions with the major region of operations in the GCC area and in Malaysia. The intended purpose of this model and its subsequent empirical analysis was twofold: on the one hand, general theoretical propositions of the strategic management literature should be tested; on the other hand, the concrete Islamic finance-specific manifestations of the various influencing factors on company performance should be examined.
Accordingly, there are also two overall conclusions of this study. First, the general theoretical propositions of the strategic management literature were largely validated. In detail, three general propositions were put to the test:
- External factors have an uneven impact on performance. While the industry structure does not explain intra-industry performance differences in Islamic finance, a more favorable global environment leads to better performance.
- Better endowment with core competencies leads to better performance.
- Company strategies have an uneven impact on performance. Some will have a positive impact on performance, others will have none.
All were essentially supported by the empirical results, albeit with a salt of grain. Second, the Islamic-finance specific manifestations of key success factors – in terms of core competencies and company strategies – were identified. It was found that
- Integrity-related core competencies are the driving force behind profitability.
- Functionality-related core competencies, integrity-related core competencies, and Sharia board efficiency and effectiveness – as internal factors – as well as product differentiation and marketing and sales differentiation, focus, and reputation as Islamic company – as company strategies – are the main drivers for customer loyalty.
- Market-access core competencies, and reputation as Islamic company – as internal factors – as well as reputation as Islamic company – as company strategy – are the main drivers for market share.
However, for both external and internal factors as well as company strategies, not all theoretically relevant factors proved to have an impact on Islamic bank performance. In the case of external factors, the relative measurement of performance could potentially explain the missing correlations of global environment and performance. In the case of internal factors, it was suggested that the empirical analysis might have isolated basic and core competencies. In the case of company strategies, the differences of implied time horizon of the various performance indicators was seen as a potential explanation for the empirical results. In all three cases, accounting practices might blur the relationship between profitability and the various influencing factors. The implications of these observations for future research will be discussed below in the last section of the study.
Another important finding of the study concerned a proposed resource-based strategic grouping of Islamic financial institutions into Islamic subsidiaries of conventional banks whose headquarters are located in the West, Islamic subsidiaries of conventional banks whose corporate headquarters are located in the GCC countries or Malaysia, and Islamic banks that are either stand-alone or belong to another Islamic bank. Performance differences across the three proposed groups were found not to be significant.
The present study made key contributions both to theoretical and empirical research. From a theoretical point of view, identifying and adding Islamic-finance specific parameters further refined the external factors, internal factors, and company strategies proposed in the literature. In particular, factors like Sharia board efficiency and effectiveness, and reputation as Islamic company were singled out.
From an empirical point of view, three important contributions were made. First, this affects the operationalisation of theoretical constructs: Reliable and valid variables for strategic management research were developed or further refined drawing on previous empirical studies. This is of particular importance for core competencies, where empirical research still has not reached maturity, and thus measurement scales are scarcely available. As is called for in the literature, they were measured at a low level of aggregation.292
Second, the empirical study adds to the discussion of firm performance and its various influencing factors in the strategic management literature. Its findings are in accordance with both the market-based view and the resource-based view of strategic management, and therefore seems to support the notion that the two perspectives are supplementary in explaining firm performance.
This also suggests that there is a need for a composite framework that will synthesize premises from both perspectives. The analysis is also in line with other studies that found no effect of company strategies on profitability.293
Third, the present research provides valuable empirical data about a particular industry. Moreover, it is the first examination of this kind for Islamic finance. This is all the more important as sources of persistent firm success might prove fundamentally context specific.294
Implications for Islamic Financial Institutions
The statistical analysis evidenced the importance of several internal factors as well as company strategies for various performance indicators, even though some of the (significant) correlation coefficients were ranging below .5. If one takes the interdependencies discovered at face value, some implications of the empirical results for the management of Islamic financial institutions can be discussed. This will be done along the lines of the individual internal factors and company strategies, respectively, starting with market-access core competencies.
Market-access core competencies proved to have a significant effect on market share. In a more detailed view, the factors customer relations and brand image correlated significantly with market share, while distribution capabilities did not. Therefore, Islamic banks do not seem to take competitive advantage of their well-built distribution networks composed of a branch and ATM network, or direct banking facilities, such as internet banking and call centers. As is proposed in the literature, distribution capabilities should rather be viewed as basic competencies.295 Islamic banks should, however, build up favorable customer relations and a favorable brand image.
The former relates to their ability to access capital, the competitive strength of their current customer base, and the general relations with their customers. The latter concerns their reputation as financial services provider and their general brand image. Islamic financial institutions should take appropriate measures to enhance their capabilities in this field.
One of the significant factors affecting customer loyalty was functionality-related core competencies. In particular, all individual items behind it – customer service, supporting processes, resource efficiency, technological equipment and capabilities, technological expertise, financial expertise, and financial processing capabilities – correlated significantly with customer loyalty, albeit to varying degrees. This suggests that Islamic banks should pay particular attention to the acquisition of such competencies. Regarding customer service, Islamic banks are advised to respond fast to customer requests, and constantly monitor and enhance the service quality in marketing and sales and transaction processing. Competencies in the supporting processes require a strong risk management, good research capabilities, a superior
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